Similarly, a firm is permitted to cut its price and thereby harm its
rivals, perhaps even drive them out of business, because failure to allow this
would cause even greater harm to consumers. For the harm principle to
make any sense at all, it must be understood to mean that the legitimacy of a
restriction must be decided by weighing its cost to those being restricted
against the harm others would suffer if the behavior weren’t restricted.
The Pivotal Contribution of Ronald CoaseRonald Coase (rhymes with “rose”) won the Nobel Prize in economics in
1991 largely on the strength of his contribution to our way of thinking about
this delicate balancing act. An economist born and educated in England,
Coase spent the latter part of his career on the faculty of the University of
Chicago Law School, where he was revered by that university’s free-market
86
CHAPTER SIX
enthusiasts as the world’s foremost authority on behavior that causes harm
to others.

…

Coase acknowledged that the wealth levels of the doctor and the factory
owner would be affected by liability rules, but he insisted that their decision
about how to solve the problem would not be.
Never ones to shrink from debate, a group of University of Chicago economists invited Coase, who was then teaching at the University of Virginia, to
Chicago to discuss his ideas with them. Twenty economists and Ronald
Coase met for dinner at the home of Aaron Director, who was then editor of
the Journal of Law and Economics, in which Coase’s paper had appeared.
Years later, Stigler offered this recollection of the evening’s conversation:
“Milton Friedman did most of the talking, as usual. He also did much of the
thinking, as usual. In the course of two hours of argument the vote went
from twenty against and one for Coase to twenty-one for Coase.

…

That is, we must
consider the possibility that the most sensible way to define rights in situations like these is, as Coase suggested, to mimic as closely as possible the
solutions people would have negotiated on their own if negotiations had
been practical. Those solutions would always place the burden of adjusting
to externalities on the party for whom that burden was least costly. Sometimes that would entail assigning liability to the party whom most would
describe as the perpetrator. But not always.
There is a measure of irony in the fact that Ronald Coase quickly emerged
as the reigning intellectual hero of free-market conservatives on all matters
related to activities that cause harm to others. Their embrace of Coase stems
largely from the perception that his framework helped expand the range of
problems believed to be soluble without regulatory intervention. That perception is accurate as far as it goes. But again, Coase was never an ideologue.

Transaction cost theory, or new institutional economics, is the branch of economics that studies the costs of transactions and the institutions that people develop to govern them. In simpler terms, it is the branch studying the cost of economic links and the ways in which people organize to deal with commercial interactions.
The origins of transaction cost theory can be traced back to a 1937 paper by Ronald Coase, “The Nature of the Firm.”4 As a young scholar, Coase realized that the descriptions of the economy that were prevalent at the time tended to overlook one aspect of the economy that seemed obvious to him: the fact that economic transactions are costly. As a student at the London School of Economics, Coase attended a seminar organized by Arnold Plant, who had been recently appointed as a professor of commerce.5 It was there that Coase heard a description of the economy that contradicted his intuition and would accompany his thoughts throughout his life.

…

Some firm-to-firm interactions are simple, such as ordering ink cartridges from a catalog, while others are incredibly complex, such as developing a partnership for the construction of a new manufacturing plant. Moreover, many firm interactions are embedded in social networks, which is a fact that we will consider in the next chapter. So talking about the cost of links is not simple, and it makes sense only when we define links narrowly enough.
Oliver Williamson, a student of Ronald Coase, understood that commercial links come in different sizes. He wrote extensively about the connection between the cost of firm-to-firm interactions and the institutions that people develop to manage these links.11 Williamson’s classification of links is based on two axes. On the first, he separated transactions by frequency, into recurrent and occasional. On the second, he separated transactions by specificity, from nonspecific to idiosyncratic.12
To understand Williamson’s parsing of the world, think about the amount of paperwork and people needed to establish a commercial link.

…

For two years our relationship evolved slowly, with a few words exchanged every day. Despite the brevity of our interactions, I drew support from them, and I am also greatly indebted to them for contributing to the environment in which these words took shape. I would be crazy not to thank them.
During the summer of 2013 I wrote what became Chapters 6 and 7 at Voltage. I also studied the ideas of Ronald Coase and Oliver Williamson there. This set the foundation for what became Part III.
In the fall of 2013 this book was still unfinished, but my daughter was ready to see the light of day. Iris’ birth changed this book. In a previous draft I already had a narrative explaining birth as an alien process—which had been inspired by Anna’s pregnancy—but I was lacking the emotional thrust of the actual event.

Friedman’s longtime secretary, Gloria Valentine, was encouraging and helpful. Others who gave interviews include Gary Becker, Anna Jacobson Schwartz, Lester Telser, Larry Sjaastad, Thomas Sowell, Sam Peltzman, Stephen Stigler, Larry Wimmer, John Turner, and the late D. Gale Johnson. Paul Samuelson sent a useful letter with reactions to some questions. For my biography of Hayek, I had the opportunity to interview W. Allen Wallis, Edwin Meese, and Ronald Coase, among others, and to talk briefly on the phone with Aaron Director.
I also thank in particular J. Daniel Hammond, Robert Leeson, and William Frazer for their work on Friedman; the University of California at Santa Barbara for use of its library and interlibrary loan program; the Hoover Institution on War, Revolution and Peace for use of its Friedman archive; the Intercollegiate Studies Institute and Young America’s Foundation for participation in conferences on Friedman; the Liberty Fund for participation in a conference on Frank Knight; Walter Mead for encouragement and assistance; Tom Schrock for continuing advice; Mark Skousen for calling various articles to my attention; Joe Atwill and Curtis Ridling, and Cyndy
x
Phillips for reviewing the manuscript; and Nik Schiffmann and Lee Gientke for research contributions.

…

Shultz says that Milton’s “brilliance as an economist is well known but perhaps as important and less exalted is his capacity as an expositor. He has a gift of clarity.... [I]f he winds up talking with someone he thinks is worthwhile he has immense patience, and a willingness to engage and argue. Milton is a great arguer, and we used to say that everyone loved to argue with Milton—when he wasn’t there!”38
Ronald Coase was among the leading economists of the twentieth century, and his influence continues to grow. His best-known contribution is the Coase theorem, essentially the idea that freedom of exchange is the ultimate requirement to reach Pareto optimality, whereby no exchange will increase any party’s welfare. In particular, the initial allocation of legal rights will not affect ultimate economic outcome as long as freedom of exchange is uninhibited.

…

In “Milton Friedman and the Emergence of the Permanent Income Hypothesis,” History of Political Economy (Spring 2003), Hsiang-Ke Chao traces the development of Friedman’s work on permanent income from the 1940s to the 1960s. Danny Quah,
Edmund W. Kitch (ed.), “The Fire of Truth: A Remembrance of Law and Economics at Chicago, 1932–1970,” Journal of Law and Economics (April 1983), is the transcript of an exceptional gathering of thirty former University of Chicago students and former and current faculty focusing on the contributions of Aaron Director and Ronald Coase to the field of law and economics. Among the participants are Milton and Rose Friedman, Stigler, Wallis, Becker, and Robert Bork, in addition to Director and Coase. There is much history and exploration of the development of ideas.
A number of obituaries were written on Director’s death in September 2004. These include Richard M. Ebeling, “Aaron Director on the Market for Goods and Ideas,” Freeman (November 2004), and Adam Bernstein, “Aaron Director Dies at 102; Helped Fuse Economics, Law,” Washington Post, September 14, 2004.

So, whether they knew it or not, were
Dean Baker, Harriet Barlow, Connie Best, James Boyce, Rachel
Breen, Marc Breslow, Peter Brown, Chuck Collins, Chris Desser,
Peter Dorman, Brett Frischmann, Robert Glennon, Charles Halpern,
Ann Hancock, Lewis Hyde, Marjorie Kelly, George Lakoff, Frances
and Anna Lappé, Kathleen Maloney, Neil Mendenhall, David
Morris, Richard Norgaard, Matt Pawa, Carolyn Raffensperger, Julie
Ristau, Mark Sommer, Allen White, Bob Wilkinson, Susan Witt,
and Oran Young.
T
| xvii |
xviii |
C A P I TA L I S M 3.0
Others whose writings have influenced me include E. F.
Schumacher, Herman Daly, John Maynard Keynes, John Kenneth
Galbraith, Ronald Coase, Louis Kelso, and Henry George.
This entire undertaking would not have been possible without
the love and support of my entire family, especially Eli and Zack.
Thank you so much.
Part 1
THE PROBLEM
Chapter 1
Time toUpgrade
Society is indeed a contract . . . between those who are living,
those who are dead, and those who are to be born.
— Edmund Burke (1792)
or the first time in history, the natural world we leave our children will be frightfully worse than the one we inherited from our
parents.

…

Free Market Environmentalism
One other version of privatism is worth considering. Its premise is
that nature can be preserved, and pollution reduced, by expanding
private property rights. This line of thought is called free market
environmentalism, and it’s favored by libertarian think tanks such as
the Cato Institute.
The origins of free market environmentalism go back to an
influential paper by University of Chicago economist Ronald Coase.
Writing in 1960, Coase challenged the then-prevailing orthodoxy
that government regulation is the only way to protect nature. In fact,
he argued, nature can be protected through property rights, provided
they’re clearly defined and the cost of enforcing them is low.
In Coase’s model, pollution is a two-sided problem involving
a polluter and a pollutee. If one side has clear property rights (for
instance, if the polluter has a right to emit, or the pollutee has a right
not to be emitted upon), and transaction costs are low, the two sides
will come to a deal that reduces pollution.

…

They’re just
there, floating in space, with no connection to humans. What I’m
suggesting is that economists treat them as if they were common
property held in trust. This simple supposition would not only put
90 |
A SOLUTION
ecosystems on the books, enabling us to track them better; it would
also pave the way to real-world property rights that actually protect
those ecosystems.
Beyond Coase’s Supposes
“Let us suppose,” economist Ronald Coase wrote in 1960, “that a
farmer and a cattle-raiser are operating on neighboring properties.”
He went on to suppose further that the cattle-raiser’s animals wander
onto the farmer’s land and damage his crops. From this hypothetical
starting point Coase examined the problem of externalities and proposed a solution—the creation of rights to pollute or not be polluted
upon. Today, pollution rights are used throughout the world.

Although the influence of companies as a species has never been more widespread, the clout of individual big companies has arguably declined. The much-vaunted idea that companies are now bigger than mere governments is, as we shall see, statistically fraudulent. Big companies are giving way to small ones, so much so, in fact, that an old question is now more pressing: What is the point of companies?
That question was most succinctly answered back in 1937 by Ronald Coase, a young British economist. In an article called “The Nature of the Firm,” he argued that the main reason why a company exists (as opposed to individual buyers and sellers making ad hoc deals at every stage of production) is because it minimizes the transaction costs of coordinating a particular economic activity. Bring all the people in-house, and you reduce the costs of “negotiating and concluding a separate contract for each exchange transaction.”

…

THREE DEBATES THAT DEFINED THE COMPANY
As the company’s role in society deepened, so did the debate about that role. Three works published in the 1930s and 1940s asked fundamental questions about this awkward institution: Why did companies exist? Whom were they run for? And what about the workers?
The most basic of these three works began as a lecture in 1932 to a group of Dundee students by a twenty-one-year-old economist just back from a tour of American industry. Five years later, Ronald Coase published his ideas in a paper in Economica called “The Nature of the Firm.” Coase tried to explain why the economy had moved beyond individuals selling goods and services to each other. The answer, he argued, had to do with the imperfections of the market and particularly to do with transaction costs—the costs sole traders might incur in getting the best deal and coordinating processes such as manufacturing and marketing.

…

By the end of 2001, General Motors boasted net-book assets (tangible things like factories, cars, and even cash) of $52 billion, but its market value of $30 billion was only a fifth of that of Merck, a drug firm that could muster a balance sheet value of $7 billion, but had a far more valuable trove of knowledge. In 1999, America’s most valuable export was intellectual capital: the country raked in $37 billion in licensing fees and royalties, compared with $29 billion for its main physical export, aircraft.6
The story of the company in the last quarter of the twentieth century is of a structure being unbundled. Companies were gradually forced to focus on their “core competencies.” Ronald Coase’s requirement of the company—it had to do things more efficiently than the open market—was being much more sorely tested.
The managers of big companies liked to claim that new technology made it more efficient to bundle things together in a single company. In a few cases, this proved correct. Big media conglomerates were able to sell the same “content” through different channels. New technology to monitor drivers in the trucking industry in the 1980s made it cheaper for shippers to employ them directly, so they got bigger. 7
Yet, for the most part, the world was moving in the opposite direction.

The question was which system works best.
That war is over. For most resources, most of the time, the market trumps the state. There are exceptions, of course, and dissenters still. But if the twentieth century taught us one lesson, it is the dominance of private over state ordering. Markets work better than Tammany Hall in deciding who should get what, when. Or as Nobel Prize-winning economist Ronald Coase put it, whatever problems there are with the market, the problems with government are far more profound.
This, however, is a new century; our questions will be different. The issue for us will not be which system of exclusive control—the government or the market—should govern a given resource. The question for us comes before: not whether the market or the state but, for any given resource, whether that resource should be controlled or free.

…

Otherwise there would be chaos, and radio's usefulness would be largely destroyed.12
It was in the nature of things, the government argued and the Court agreed, that only if spectrum were controlled by the government would spectrum be usable. Spectrum could not be free.
ABOUT THE TIME the Supreme Court came to this conclusion, an English economist was concluding just the opposite. In a review of the FCC's regulation of spectrum, economist Ronald Coase concluded that there was no justification for political regulation of access to spectrum.13 Spectrum was no more “scarce” than land or trees were scarce. Scarcity is the nature of all valuable resources; but not all valuable resources are allocated by the government—at least, not in a free society. 14
Rather than a regime of licensing, Coase argued, spectrum should be allocated into property rights and sold to the highest bidder.15 A market for spectrum would better and more efficiently allocate spectrum than a system of government-granted licenses.

…

If you want to sell very weird widgets, and only a hundred thousand people are within range, then you're not likely to be able to sell enough widgets to make it worthwhile. But if you had the world as your market—if the code layer facilitated broad distribution of selective information about widgets, thus lowering the cost of information—then you might have a market large enough to make your weird widget factory work. As Ronald Coase puts it:
People talk about increases in improvements in technology, but just as important are improvements in the way in which people make contracts and deals. If you can lower the costs there, you can have more specialization and greater production. . . . By improving the way the market works, you can produce immense benefits, not because it invents new technologies, but because it enables new technologies to be used. 28
The net of these layers of control in real space is relatively simple to map.

Instead, a group of people comes together: someone writes a script, someone agrees to direct, someone else puts up the money, actors and a production crew get chosen, the film is made, a distributor is found, and then the group disassembles, perhaps never to see each other again. Why not do everything this way?
The oldest—and still the best—answer to that question was offered by British economist Ronald Coase in 1937. The problem with the “outsource everything” model, Coase saw, was that setting up and monitoring all those different deals and contracts takes a lot of time and effort. It takes work to find the right people, and to haggle with them over how much you’ll pay them. It takes work to ensure that everyone’s doing what they promised they would do. And it takes work to make sure, after everything’s done, that everyone gets what’s coming to them.

…

The third model can be found in movies like The Asphalt Jungle and Reservoir Dogs, where a group of individuals comes together to pull off a single job and then disperses, very much the way an independent film gets made. This model allows people to be handpicked for their diverse abilities (planning, safecracking, explosives, etc.), so that the group can have exactly what it needs for the job. And the one-off nature of the project ensures that everyone on the team has an incentive to perform well.
The problems with this model, though, are precisely those that Ronald Coase had in mind when he talked about transaction costs. It takes a lot of work to put the group together. It’s difficult to ensure that people are working in the group’s interest and not their own. And when there’s a lack of trust between the members of the group (which isn’t surprising given that they don’t really know each other), considerable energy is wasted trying to determine each other’s bona fides.

…

But, in general, whatever sacrifice might be entailed in ruling out a possibly brilliant hunch is compensated for by the better-than-average results which can be expected from a policy that can be strongly defended against well-informed and sympathetic criticism.”
Similarly, Welch’s most important initiative as CEO of General Electric was his transformation of the company into what he called a “boundaryless corporation.” Harking back to the questions raised by Ronald Coase, Welch tried to make the boundaries between GE and outside markets more permeable. He broke down boundaries between GE’s different divisions, arguing that a more interdisciplinary approach to problems fostered diversity. He sharply reduced the layers of management separating the people at the top from the rest of the company. And by creating what were known as “Work-Out” sessions, where managers were subjected to often stinging public criticism from those they managed, he tried to make the boundaries between bosses and subordinates less rigid.

Supply and demand bypasses questions of how buyers and sellers get together, what other dealings they have, how buyers evaluate what they are buying, and how agreements are enforced. Three Nobel laureates noted this oddity. George Stigler found it “a source of embarrassment that so little attention has been paid to the theory of markets.” Douglass North noted the “peculiar fact” that economics “contains so little discussion of the central institution that underlies neoclassical economics—the market.” Ronald Coase complained that the market has a “shadowy role” in economic theory, and “discussion of the market itself has entirely disappeared.”
The Nobel laureates’ critique has now been addressed. Modern economics has a lot to say about the workings of markets. Theorists have opened up the black box of supply and demand and peered inside. Game theory has been brought to bear on the processes of exchange.

…

Any externality can be viewed as resulting from the incompleteness of property rights. If the air were private property, the owner could charge polluters for the “use” of it, and then there would be no externality. No one can own the air, of course, but in some other cases broadening property rights can be an effective solution.
Given clearly defined property rights, individuals may negotiate a mutually beneficial solution to an externality, as Nobel laureate Ronald Coase pointed out. Imagine a cattle rancher who harms his neighbor, a corn grower, by not maintaining the fence, so the cattle wander into the cornfield and damage the crop. Suppose that fixing the fence would create value (since the repair cost is smaller than the cattle’s damage). If the corn grower has recourse to the courts, then the cattle rancher would fix the fence under the threat of being sued.

…

Why isn’t everyone an independent contractor instead of a hired employee? The answer is that firms exist as a response to market frictions. Sometimes it is less expensive to run a hierarchy than to use the market. Whether a firm produces its inputs in-house or procures them from other firms depends on the relative costs of each form of transaction. One of the factors affecting this comparison, as Ronald Coase wrote in 1937, is the efficiency with which markets work. Where the transaction costs of using the market are high, firms tend to make inputs themselves. Where markets work smoothly, firms contract out much of the work.
Firms do not necessarily need their own in-house production capabilities to benefit from economies of scale. Cisco Systems Inc., the market leader in routers (the hardware used for managing the internet’s traffic), is almost a virtual firm.

Moreover, Smith contended that economic progress and surplus wealth were a prerequisite for sympathy and charity. In short, Smith desired to integrate economics and moral behavior (Fitzgibbons 1995, 3-4; Tvede 1997, 29).
The Scottish philosopher believed man to be motivated by both self-interest and benevolence, but in a complex market economy, where individuals move away from their closest friends and family, self-interest becomes a more powerful force. In Ronald Coase's interpretation, "The great advantage of the market is that it is able to use the strength of self-interest to offset the weakness and partiality of benevolence, so that those who are unknown, unattractive, and unimportant will have their wants served" (Coase 1976, 544).
How Monopoly Hurts the Market System
Smith said that competition was absolutely essential to turning self-interest into benevolence in a self-regulating society.

…

The invisible hand idea, that laissez-faire leads to the common good, has become known as the first fundamental theorem of welfare economics (as noted in chapter 1). Welfare economics deals with the issues of efficiency, justice, economic waste, and the political process in the economy. Since the late 1930s, when welfare economics was popularized by John Hicks, Kenneth Arrow, Paul Samuelson, and Ronald Coase (all of whom became Nobel Prize winners), the technique of welfare economics has been extended to issues of monopoly and government policies. In most cases, the welfare economists have demonstrated that government-imposed monopoly and subsidies lead to inefficiency and waste.
Walras, Pareto, and Edgeworth were the first economists to use advanced mathematical formulas and graphic devices to prove certain hypotheses in welfare economics.

…

But attitudes are quickly changing in the twenty-first century by applying its micro principles of competition, incentives, and opportunity cost to solve a host of public and private problems. In short, twenty-first-century economics is the "imperial science" (Skousen 2001, 7-10).
Here are just a few examples of the expanding role of economics in other areas: Gary Becker has been instrumental in applying the principles of supply and demand to the human behavioral sciences in areas such as racial discrimination, crime, and marriage. Ronald Coase, Richard Posner, and Richard Epstein have contributed to the development of law and economics.
Harry Markowitz, Merton Miller, William Sharpe, Burton Malkiel, and Fischer Black, among others, have created the field of financial economics, especially the application of efficiency markets to Wall Street. Robert Fogel and Douglass C. North have applied statistical analysis (known as "cliometrics") to a variety of historical events and trends.

Take Clay Shirky’s Here Comes Everybody, which enjoys a cult status in geek circles as a seemingly original argument about the falling costs of collaboration. For much of his theoretical apparatus, Shirky draws on two sources: Susanne Lohmann’s explanation of the 1989 protests in East Germany by means of rational-choice theory (from which Shirky borrows the notion of information cascades) and Ronald Coase’s theory of the firm (from which Shirky borrows the notion of transaction costs). Alas, neither of them is an unambiguously good or neutral guide to understanding digital technologies once we liberate ourselves from Internet-centrism.
Like most scholars in the rational-choice tradition, Lohmann—whom Shirky misidentifies as a historian (she’s a political scientist)—doesn’t explain collective action of East Germany by attending to historical and cultural factors or tracing the emergence of new attitudes or ideologies.

…

To challenge this ideology and this way of talking and thinking is to be immediately dismissed as too pessimistic or optimistic, as if no other type of critique were even conceivable. It’s one of the hallmarks of Internet-centrism—at least as it manifests itself in the popular debate—that it brooks no debates about methodology, for it presumes that there’s only one way to talk about “the Internet” and its effects.
Shirky’s veneration of Ronald Coase’s theory of the firm—and its accompanying discourse on transaction costs—may seem harder to dismiss, not least because Coase is a Nobel Prize–winning economist. References to Coase pop up regularly in the work of our Internet theorists; in addition to Clay Shirky, Yochai Benkler also draws heavily on Coase to discuss the open-source movement. There is nothing wrong with Coase’s theories per se; in the business context, they offer remarkably useful explanations and have even helped spawn a new branch of economics.

What changed was the ease of making
them — and as I said that is normally a secondary consideration. As
Weber put it, recall, “the impulse to acquisition, pursuit of gain, of
money, of the greatest possible amount of money, . . . has been common
to all sorts and conditions of men at all times and in all countries of the
earth, wherever the objective possibility of it is or has been given.” What
changed were “transaction costs,” in the phrase of the great economist
Ronald Coase (1910- ), that is, the costs of getting together to make a deal
— transportation costs, the costs of robbers on the highway or in the
market, the costs of trust, the costs of insurance, the costs of using credit,
the costs of getting coins and bills, the costs of negotiation, the costs of
taboo, the costs of sneering at the bourgeoisie. All these make deals more
expensive, and many of them are directly measurable.

…

As a young
professor at the University of Washington in the 1950s he was one of the
chief entrepreneurs of the so-called “new” economic history, that is, the
application of economic theory and statistics to historical questions, such
as how regional growth happened in the United States before the Civil
War. For this he was in 1993 awarded with Robert Fogel the Nobel
Memorial Prize in Economic Science.
North’s pioneering study of ocean freight rates from the
seventeenth to the eighteenth century (North 1968) led him in the 1970s
to ponder the evolution of what had in an economics influenced by
Ronald Coase come to be called “transaction costs,” that is, the costs of
doing business. Moving cotton from Savannah to Liverpool entails
transportation costs, obviously. Less obviously — the point was made by
Coase in all his work from the 1930s on — moving a piece of property
from Mr. Jones to Ms. Brown entails transactioncosts, such as the cost of
arriving at a satisfactory contract to do so and the cost of insuring against
its failure.

…

Efficient organization entails the establishment of institutional
arrangements and property rights that create an incentive to channel
individual economic effort into activities that bring the private rate of
return close to the social rate of return . . . . If a society does not grow it is
because no incentives are provided for economic initiative.”23 About that
same time, inspired I think by such words, and certainly by Steve
Cheung, my office mate at the University of Chicago, and Ronald Coase
across the way at the Law School, I studied the English legal history of
the eighteenth century with exactly the Samuelsonian prejudice about
“constraints” North began then to exhibit. But I soon realized that the
timing of institutional change in England fits poorly with its economic
285
change. As many economic historians before and after me have noted,
the institutions relevant to the economy of Britain in fact did not change
much in the very late seventeenth century, or even over the long
eighteenth century 1688-1815.

Modern accounting sprang from the curious mind of Luca Pacioli in Italy during the fifteenth century. His deceptively simple invention was a formula known as double-entry accounting, where every transaction has two effects on each participant, that is, each must enter both a debit and a credit onto the balance sheet, the ledger of corporate assets and liabilities. By codifying these rules, Pacioli provided order to an otherwise ad hoc practice that prevented enterprises from scaling.
Ronald Coase thought accounting was cultlike. While a student at the London School of Economics, Coase saw “aspects of a religion” in the practice. “The books entrusted to the accountants’ keeping were apparently sacred books.” Accounting students deemed his challenges “sacrilegious.”53 How dare he question their “many methods of calculating depreciation, valuing inventories, allocating on-costs, and so on, all of which gave different results but all of which were perfectly acceptable accounting practices,” and other nearly identical practices that were nonetheless deemed entirely “unrespectable.”

…

So why would any established firm—particularly ones that make their money off other people’s data, operate largely behind closed doors, and suffer surprisingly little in data breach after data breach—want to leverage blockchain technologies to distribute power, increase transparency, respect user privacy and anonymity, and include far more people who can afford far less than those already served?
Transaction Costs and the Structure of the Firm
Let’s start with a little economics. In 1995, Don used Nobel Prize–winning economist Ronald Coase’s theory of the firm to explain how the Internet would affect the architecture of the corporation. In his 1937 paper “The Nature of the Firm,” Coase identified three types of costs in the economy: the costs of search (finding all the right information, people, resources to create something); coordination (getting all these people to work together efficiently); and contracting (negotiating the costs for labor and materials for every activity in production, keeping trade secrets, and policing and enforcing these agreements).

…

In summary, these are seven of the emerging business models whereby both companies large and small can make it “rain on the blockchain.” Overall, the open networked enterprise shows profound, even radical potential to supercharge innovation and harness extraordinary capability to create good value for shareholders, customers, and societies as a whole.
HACKING YOUR FUTURE: BUSINESS MODEL INNOVATION
As for a company managed by software agents, Ronald Coase must be high-fiving up there somewhere in Economists’ Heaven (although some might dispute that such a place exists). Remember the reverse of Coase’s law? A corporation should shrink until the costs of transactions inside are less than the costs of transactions outside its boundaries. As technology continues to drop costs in the market, it’s conceivable that corporations could and should have very little inside—except software and capital.

But there have been hundreds—probably thousands—of scholarly studies of the effectiveness of government regulation, and these studies show that usually regulation either is ineffective or makes a problem worse. Many of these studies have been published in the prestigious, peer-reviewed Journal of Law and Economics, published by the University of Chicago Law School. The onetime-editor of the Journal, Nobel laureate Ronald Coase, summed it up:
There have been more serious studies made of government regulation of industry in the last fifteen years or so, particularly in the United States, than in the whole preceding period. These studies have been both quantitative and nonquantitative. . . . The main lesson to be drawn from these studies is clear: they all tend to suggest that the regulation is either ineffective or that when it has a noticeable impact, on balance, the effect is bad, so that consumers obtain a worse product or a higher-priced product or both as a result of regulation.

…

John Kerry, meanwhile, condemned the Bush administration for its “obsession with giveaways to their friends in the oil business” and declared that “these blackouts also expose some of the failures of this administration’s energy policies” (quoted on Meet the Press, NBC, August 17, 2003).
CONCLUSION: THE NEVER-ENDING
WAR ON CAPITALISM
1. Michel Jensen and William Meckling, “The Future of Capitalism,” Financial Analyst’s Journal, May 1978, 1.
2. Ludwig von Mises, Liberalism: In the Classical Tradition (Irvington, NY: Foundation for Economic Education, 1985), 102.
3. Ronald Coase, “Economists and Public Policy,” in J. Fred Weston, ed., Large Corporations in a Changing Society (New York: New York University Press, 1975).
4. Fred S. McChesney, Money for Nothing: Politicians, Rent Extraction, and Political Extortion (Cambridge: Harvard University Press, 1997).
5. Ibid., inside cover.
6. Ibid., 57.
7. Ibid., 63.
8. Stanley J. Liebowitz and Stephen E. Margolis, Winners, Losers, and Microsoft: Competition and Antitrust in High Technology (Oakland, CA: Independent Institute, 1999).
9.

These are the costs involved in ensuring that the buyer gets the service he requires and that the supplier receives proper compensation.
Where transaction costs are high, it is difficult to get markets to work. For example, lighthouses find it hard to charge passing ships for their service. Traditional economists had bundled these into a separate sort of product, known as “public goods,” where markets will fail and the goods must be purchased by the state. But as the Chicago economist Ronald Coase pointed out, the difference between the transaction costs involved in the provision of lighthouses and other goods is one of degree, not of quality. He noted that the first lighthouses were privately provided by the operators of nearby ports, and concluded that by dividing the world into “private goods,” where markets would regulate prices effectively, and “public goods,” where they would not, economists had posed the wrong question.30 The issue was not about whether there should be state or private provision, but how best to manage transaction costs so that the buyer and seller could easily strike a good deal.

…

Merriam-Webster.com defines capitalism as “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.” Other dictionaries similarly cite private ownership as central to the definition of capitalism. www.merriam-webster.com/dictionary/capitalism, accessed September 27, 2013. Indeed, for economists such as Ronald Coase and Friedrich Hayek, the marriage of ownership and control rights is essential to the effective working of the system.
3. Warren Buffett, letter in 2002 Annual Report of Berkshire Hathaway.
4. James Saft, “The Wisdom of Exercising Patience in Investing” (Reuters, March 2, 2012). This is not a new phenomenon. The average duration of mutual fund holdings has not changed much in a quarter of a century, averaging about 1.2 to 1.5 years, according to University of Notre Dame research professor Martijn Cremers.

But whoever controls the resource, and however his control is protected, he
will find it to his private advantage to direct the resource to its most
profitable use, regardless of whether that use is by him or by his neighbor.
The court cannot affect the profitability of either enterprise and therefore
cannot control how the resource is employed.
This startling observation about the impotence of judges was made in 1961
by Professor Ronald Coase of the University of Chicago Law School.
While it is obvious once stated, it seems to have come as a revelation to
economists, jurists, and legal scholars. It also marked the birth of a new
academic specialty: the economic analysis of law.
In Coase's honor, his observation has come to be called the Coase Theorem.
It applies whenever the parties to a dispute are able to negotiate, to strike
bargains, and to be confident that
86
GOOD AND EVIL
their bargains are enforceable.

…

Why Taxes Are Bad: The story of the lost dollar bill is a fiction but could
have been a truth. When I presented David Friedman with the airline ticket
conundrum from the end of the chapter, he immediately responded by
telling me that if I believed in an efficiency standard for personal conduct, I
was honor-bound not to retrieve the next dollar bill that I dropped.
Of Medicine and Candy, Trains and Sparks: The entire chapter is inspired
by Ronald Coase's article on social cost, published in the Journal of Law
and Economics in 1960.
Sound and Fury: James Kahn pointed out to me the irony of Al Gore's
timing.
How Statistics Lie: The observation about Star Market's misleading
advertising is due to Walter Oi.
The Policy Vice: The observation that the possibility of "scoops" might
justify either taxing or subsidizing inventors is due to Marvin Goodfriend.

Different people within, and different parts of, an organization need to communicate with each other; and the larger an organization, the harder that is to do. Most organizations are hierarchical, making communications easier. And militaries have generally been examples of the largest-sized organization a particular technological level can produce. But there's a limit where the costs of communications outweigh the value of being part of one organization. Economist Ronald Coase first pointed this out in 1937. Called “Coase's limit” or “Coase's ceiling,” it's the point of diminishing returns for a company: where adding another person to an organization doesn't actually add any value to the organization. You can think of an employee inside of an organization having two parts to his job: coordinating with people inside the organization and doing actual work that makes the company money.

Such resources are a
necessary precondition of power; but without an effective way of managing them, the power
they create is less effective, more transient, or both. Weber’s central message was that without
a reliable, well-functioning organization, or, to use his term, without a bureaucracy, power
could not be effectively wielded.
If Weber helped us understand the rationale and workings of bureaucracy in the exercise of
power, the British economist Ronald Coase helped us understand the economic advantages that
they conferred on companies. In 1937, Coase produced a conceptual breakthrough that
explained why large organizations were not just rational according to a certain theory of
profit-maximizing behavior but, indeed, often proved more efficient than the alternatives. It
was no coincidence that, while still an undergraduate, in 1931–1932, Coase carried out the
research for his seminal paper, “The Nature of the Firm,” in the United States.

…

Marxists argued that the expansion of
capitalism brought with it the reinforcement of class divisions and, through imperialism and
the spread of finance capital around the world, the replication of these divisions both within
countries and between them.
But the rise of large hierarchical organizations focused a very particular critique that owed
a debt to Weber, for its focus, and to Marx, for its argument. In 1951, the Columbia University
sociologist C. Wright Mills published a study titled White Collar: The American Middle
Classes.26 Like Ronald Coase, Mills was fascinated by the rise of large managerial
corporations. He argued that these firms, in their pursuit of scale and efficiency, had created a
vast tier of workers who carried out repetitive, mechanistic tasks that stifled their imagination
and, ultimately, their ability to fully participate in society. In short, Mills argued, the typical
corporate worker was alienated. For many, that alienation was captured in the warning printed
on the Hollerith punch cards that, thanks to IBM and other data processing firms, became
ubiquitous symbols and agents of bureaucratized life during the 1950s and 1960s: “Do Not
Fold, Spindle, or Mutilate.”

…

All of these differences in business scope, resources,
and operating environment affect the cost of doing business, decisions to expand, and the
choice of whether to take on an activity in-house or to farm it out to a supplier or contractor. In
short, they produce the structure of industries.
A whole field of economics—industrial organization—arose almost a century ago to make
sense of industry structure and explain what made it change, or not change. As discussed in
Chapter 3, the field drew on the insight of Ronald Coase, the British economist who in 1937
first propounded the notion that transaction costs helped to explain why firms and industries
took particular shapes.22
Individually or together, the companies that dominate a particular industry or marketplace
spend a great deal of their energy working to keep things that way. For a company, the aim is to
present a unique and attractive selling proposition—one that is hard for any other to imitate, or
replicate.

187
The classical economists like Adam Smith were almost silent on the question of
firm size. They did not address what influences the optimal size of firms, why firms take
the form they do, or even why firms exist at all. Why do entrepreneurs hire employees,
rather than placing every task that needs doing out to bid among independent contractors
in the auction market? Nobel Prize-winning economist Ronald Coase helped launch a
new direction in economics by asking some of these important questions. The answers
he helped to frame hint at the revolutionary consequences of information technology for
the structure of business. Coase argued that firms were an efficient way to overcome
information deficits and high transaction costs.26
Information and Transaction Costs
To see why, consider the obstacles you would have faced in trying to operate an
industrial-era assembly line without a single firm to coordinate its activities.

…

"Competitive Territorial Clubs"
This is more than merely a theory, as articulated first by economist Charles
Tiebout in 1956.30 As economist Fred Foldvary has documented in Public Goods and
Private Communities: The Market Provision of Social Services, there is no essential
reason that social services and many public goods must be provided by political means.
274
Foldvary's examples, among others, also confirm the controversial theorem of Nobel
Prize~winning economist Ronald Coase that "government intervention is not needed to
resolve externality issues," such as problems of pollution.31 Entrepreneurs can provide
collective goods by market means. Many already do so now in real world communities.
Foldvary's case studies show how the privatization of communities can result in
new mechanisms for providing and financing public goods and services.32
The Road to Prosperity
Microtechnology itself will facilitate new means of financing and regulating the
provision of goods heretofore treated as public goods.

As in most other companies operating in markets where there are quick product and technology turnover rates, the managements of failing firms also know that over time there is only one question that should keep them awake at night: should we destroy our own offering, or should we let another company do it for us?
Still they failed. And to understand the mechanics of failure we need first to understand the firm and why it exists. There is no better starting point than Ronald Coase, the Nobel laureate in economics who rebelled against “blackboard economics” and made the firm the center of economic inquiry. Coase started from a simple, almost banal, observation – surprisingly controversial at the time. Companies, he argued, are not black boxes that cannot be understood by economists. Nor are the successes and failures of firms mysteriously shielded from generalized observations about how economies work.

…

This is the paradox of globalization: it has raised the efficiency of economies while concurrently reducing the space for contestable innovation.
Globalization has moved the boundaries between firm and market
In order to understand second-generation globalization and how it could spur efficiency rather than contestable innovation, and generally create markets with managed competition, we need to go back to the basics of industrial organization, and especially Ronald Coase. As companies grew bigger, global, and fragmented they changed their habits but not their character. They still operate, for want of a better word, on “the Coasean principle,” the source code of corporate behavior that we introduced in the previous chapter.
The beauty of globalization was that it cut market transaction costs – and, as a consequence, allowed for a reorganization of production.

…

Countries such as Finland, France, Germany, and the UK are more dependent on larger enterprises (with a workforce in excess of 250 people) than Italy, Portugal, and Spain.60 As we have discussed previously, large firms are closer to the productivity frontier. They help to import new technology and better production processes, partly because they are anchored in international markets to a far greater degree than small firms. Their FDI is a vehicle for raising productivity and prosperity in many parts of the world.
Ronald Coase’s simple idea helps us to understand how concentration in recent decades has gone up – and progressively reduced the space for market experimentation and contestability. As market transaction costs were reduced, firms narrowed their ownership advantages and put a lot more effort into raising the boundaries around them and their assets. Globalization offered smart global companies a chance to, first, reinforce the role played by their size and market reach in competition.

It should not, the intuitions of the late-twentieth-century American would say, be the case that thousands of volunteers will come together to collaborate on a complex economic project. It certainly should not be that these volunteers will beat the largest and best-financed business enterprises in the world at their own game. And yet, this is precisely what is happening in the software world.
120 Industrial organization literature provides a prominent place for the transaction costs view of markets and firms, based on insights of Ronald Coase and Oliver Williamson. On this view, people use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of the costs of organizing and managing a firm. Firms emerge when the opposite is true, and transaction costs can best be reduced by [pg 60] bringing an activity into a managed context that requires no individual transactions to allocate this resource or that effort.

…

This engineering technique, adopted by Marconi in 1900, formed the basis of our notion of "spectrum": the range of frequencies at which we know how to generate electromagnetic waves with sufficient control and predictability that we can encode and decode information with them, as well as the notion that there are "channels" of spectrum that are "used" by a communication. For more than half a century, radio communications regulation was thought necessary because spectrum was scarce, and unless regulated, everyone would transmit at all frequencies causing chaos and an inability to send messages. From 1959, when Ronald Coase first published his critique of this regulatory approach, until the early 1990s, when spectrum auctions began, the terms of the debate over "spectrum policy," or wireless communications regulation, revolved around whether the exclusive right to transmit radio signals in a given geographic area should be granted as a regulatory license or a tradable property right. In the 1990s, with the introduction of auctions, we began to see the adoption of a primitive version of a property-based system through "spectrum auctions."

First, during the Depression in the 1930s, business leaders in major developed economies around the world were motivated to exploit the capabilities of new communication and transportation infrastructures more effectively to harness scalable efficiency and compete during a period of stagnant or declining demand. Second, during the 1950s, another generation of business leaders broadened their horizons to scale push programs beyond national boundaries to take advantage of trade liberalization and to serve global markets.
It is no coincidence that the famous British economist Ronald Coase wrote his path-breaking essay, “The Nature of the Firm,” in 1937.4 He effectively captured the primary thrust of institution-building during this period, arguing that firms existed to reduce the transaction costs that made coordinating activity across independent entities difficult. For this insight, he won the Nobel Prize in Economics.
As firms deployed these new push-based approaches, other institutions underwent similar transformations.

…

Chapter 1
1 Timothy Ferris, The Four-Hour Work Week (New York: Crown, 2007).
2 A Gallup poll found that 55 percent of all U.S. employees are bored at least part of the time they’re at work. See Heath Row, “Yawn and Guarded,” Fast Company Member Blog, February 8, 2008, http://www.fastcompany.com/blog/heath-row/yawn-and-guarded.
3 See for instance, Alfred D. Chandler Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge: Harvard University Press, 1994).
4 Ronald Coase, “The Nature of the Firm,” Economica 4, no. 16 (November 1937): 386-405.
5 For more about the role of real-time information in the Saffron Revolution, as well as in other political crises, see Nik Gowing, “‘Skyful of Lies’ and Black Swans: The New Tyranny of Shifting Information Power in Crises,” Reuters Institute for the Study of Journalism, May 2009, http://reutersinstitute.politics.ox.ac.uk/fileadmin/documents/Publications/Skyful_of_Lies.pdf.
6 Ibid.
7 See, for instance, “‘Neda’ Becomes Rallying Cry for Iranian Protests,” CNN, June 22, 2009, http://www.cnn.com/2009/WORLD/meast/06/21/iran.woman.twitter/index.html?

See a number highlighted by Glyn Moody in “Submission to UK
Independent Review of ‘IP’ and Growth,” February 24, 2011, available
at: http://blogs.computerworlduk.com/open-enterprise/2011/02/
submission-to-uk-independent-review-of-ip-and-growth/index.htm.
51. Ian Hargreaves, Digital Opportunity: A Review of Intellectual
Property and Growth, Executive Summary (May 2011).
52. Id. Chapter 10, paragraph 10.7.
53. Id., paragraph 10.10.
54. Id., paragraph 10.6.
55. Media Piracy in Emerging Economies at 16. Ronald Coase similarly
pointed out the proper approach is to “compare the total social
product yielded by ...different arrangements,” Ronald Coase, The
Problem of Social Cost, 3 Journal of Law and Economics 1, 34
(1960).
56. Both charts are taken from this source: http://theunderstatement.
com/post/3362645556/the-real-death-of-the-music-industry.
57. Available at: http://yarchive.net/macaulay/copyright.html. He also
pointed out that the rights would have been owned by a publisher
who would have pocketed all the royalties anyway.
58.

With new labour laws that strengthen worker rights, land reform that reduces the supply of cheap labour to factories (as more people stay in the countryside) or industrial policies that create high-skilled jobs, the choice for workers can be between low-wage jobs and higher-wage ones, rather than between low-wage jobs and no jobs.
The Neoclassical school’s focus on exchange and consumption makes it neglect the sphere of production, which is a large – and the most important, according to many other schools of economics – part of our economy. Commenting on this deficiency, Ronald Coase, the Institutionalist economist, in his 1992 Nobel Economics Prize lecture, disparagingly described Neoclassical economics as a theory fit only for the analysis of ‘lone individuals exchanging nuts and berries on the edge of the forest’.
The Marxist School
One-sentence summary: Capitalism is a powerful vehicle for economic progress, but it will collapse, as private property ownership becomes an obstacle to further progress.

…

Social institutions and the structure they create were everything; individuals were seen as being totally determined by the society they live in – ‘there is no such thing as an individual’, infamously declared Clarence Ayres, who dominated the (declining) Institutionalist school in the US in the early post-Second World War period.
Transaction costs and institutions: the rise of the New Institutional Economics
From the 1980s, a group of economists with Neoclassical and Austrian leanings – led by Douglass North, Ronald Coase and Oliver Williamson – started a new school of institutional economics, known as the New Institutional Economics (NIE).23
By calling themselves institutional economists, the New Institutionalist economists made it clear that they were not typical Neoclassical economists, who looked at only individuals but not the institutions that affect their behaviour. However, by emphasizing the adjective new, this group clearly dissociated itself from the original Institutionalist school – now called the Old Institutional Economics (OIE).

As John Seely Brown has noted, the half-life of a learned skill used to be about thirty years. Today it’s down to about five years. In his recent book, The Startup of You, LinkedIn founder Reid Hoffman notes that individuals will increasingly learn to manage themselves as companies, with brand management (MTP!), and marketing and sales functions all brought down to the individual. Similarly, Ronald Coase, who won the Nobel Prize in Economics in 1991, noted that enterprises are more like families than industries, and that corporations are more of a sociological construct than an economic one.
For any company today, having a permanent, full-time workforce is fraught with growing peril as employees fail to keep their skills up to date, resulting in personnel in need of greater management. In our fast-changing global and Internet-driven marketplace, increasingly desperate organizations are turning to external and temporary workforces to fill their expertise gaps.

…

Replacing five-year plans with these new, real time elements can be scary but it’s also liberating, and the rewards for those willing to stay on the ride will be both decisive and astonishing. Besides, being eaten alive by an upstart competitor is anything but relaxing.
This shift will, of course, be quite challenging for large organizations, which rely on drawn-out projections and tracking for planning and control purposes.
6. Smaller Beats Bigger (aka Size Does Matter, Just not the Way You Think)
Ronald Coase won the 1991 Nobel Prize in Economics for his theory that larger companies do better because they aggregate assets under one roof and, as a result, enjoy lower transaction costs. Two decades later, the reach delivered by the information revolution has negated the need to aggregate assets in the first place.
For decades, scale and size have been desirable traits in an enterprise. A bigger company could do more, the argument went, because it could leverage economies of scale and negotiate from strength.

Nevertheless, because many firms after the Industrial Revolution were actually organized in just this way, the consensus of economic theory for much of the last century has been that the optimal form of industrial organization, and, by association, the internal architecture of a business firm, is a hierarchy.
To cut a (very) long story short, the most generally agreed-upon economic theory of industrial organization essentially divides the world between hierarchies and markets. Firms, it claims, exist because markets in the real world suffer from a set of imperfections that the Nobel Prize–winning economist Ronald Coase called transaction costs. If everyone could discover, draw up, and enforce market-based contracts with everyone else (if we could all be independent contractors, for example), then the immense flexibility of market forces would effectively eliminate the need for firms entirely. But in the real world, as we have already seen in a number of contexts, information is costly to discover and hard to process.

…

Markets and Hierarchies
The original text—and still one of the greatest—on industrial organization is
Smith, A. The Wealth of Nations (University of Chicago Press, Chicago, 1976).
A precursor to Coase’s theory of transaction costs was Frank Knight’s claim that firms exist to reduce uncertainty:
Knight, F. H. Risk, Uncertainty, and Profit (London School of Economics and Political Science, London, 1933).
And Ronald Coase’s original argument of transaction costs as the basis for the firm is explicated in
Coase, R. The nature of the firm. Economica, n.s., 4 (November 1937).
Several decades later, Coase is still trying to get his ideas accepted by mainstream economics. His latest attempt is
Coase, R. The Nature of the Firm (Oxford University Press, Oxford, 1991).
The chief proponent of the hierarchical structure of firms is Oliver Williamson, whose views are expressed comprehensively in
Williamson, O.

In total, companies building platforms to tap into excess capacity raised more than $5.5 billion that year, which was close to four times what had been raised by similar companies in 2013, which was again more than double what had been raised in 2012.5
What is happening? The Internet has eliminated a key corporate competitive advantage. In 1937, in the influential essay “The Nature of the Firm,” British economist Ronald Coase wrote that the corporation was invented to do things that individuals and small companies couldn’t do. In particular, small companies would choose to become larger companies whenever it was cheaper to hire than to outsource. What would make hiring cheaper than outsourcing? Transaction costs (a term Coase invented). Finding, monitoring the quality of, and managing many discrete individuals was expensive.

…

Both business and labor would gain from the new fluidity and responsiveness. Employers could respond more rapidly to market forces; workers could diversify their income streams and transition from dying industries or boring jobs in an adaptive way that was much more in their control. The “job for life” that was the hallmark of corporate America in the 1950s has been gone for close to two generations. Way back in Chapter 1, I talked about the economist Ronald Coase and his work showing that companies grew bigger in order to avoid transaction costs grounded in lack of information. The corollary to this insight was his prediction that as markets become more efficient because of better information flow, companies will tend to get smaller and smaller. Our platforms are such places, where tiny little companies (often independent contractors) find each other and interact, together creating larger economic processes But in a genuinely efficient platform economy, in which assets and labor flow to the most productive uses, the job-for-life benefits package provided by private companies evaporates.

Some farmers could reduce their pollution more efficiently than others. If a declining quantity of pollution rights were issued and farmers could trade them, Dales argued, farmers themselves would find the cheapest ways to cut their pollution.
Economists, if not farmers, picked up the idea and started applying it, conceptually, to other forms of pollution. In doing this, they were influenced not just by Dales but also by Nobel Prize—winning economist Ronald Coase, who in an oft-quoted paper, “The Problem of Social Cost,” argued that property rights could solve the problem of externalities without government regulation.2 (Coase was part of the University of Chicago school of thought, which holds that markets do almost everything better than government.)
In 1990, the idea made its way into national legislation. That year’s amendments to the Clean Air Act created a cap-and-trade system to reduce sulfur dioxide emissions from coal-burning power plants, a major cause of acid rain.

However, the drive to offshore outsource manufacturing in the advanced economies, which was mutually symbiotic with the frustration of capital controls, was clearly a function of neoliberal doctrines concerning the unbounded benefits of freedom of international trade, combined with neoliberal projects to reengineer the corporation as an arbitrary nexus of contractual obligations, rather than as a repository of production expertise. The MPS member Anne Krueger was brought into dialogue with her fellow member Ronald Coase, and the offspring was the flight of capital to countries such as China, India, and the Cayman Islands. The role of China as beneficiary, but simultaneously as part-time repudiator of the neoliberal globalized financial system, is a question that bedevils all concerned.
While freedom of capital flows have not generally been stressed by neoliberals as salient causes of the crisis, they do manage to unite in opposition to capital controls as one reaction to the crisis

…

In effect, this strategy is an elaborate bait-and-switch, where political actors originally bent upon using state power to curb emissions are instead diverted into the endless technicalities of the institution and maintenance of novel markets for carbon permits, with the not unintended consequence that the level of emissions continues to grow apace in the interim. Furthermore, professional economists are brought in to shill for this strategy, largely because they enjoy conflicts of interest in this area of a magnitude commensurate with those they have nurtured with the financial sector in general. The neoliberal genealogy of this approach is conventionally traced back to the MPS member Ronald Coase, who first proposed that pollution could be optimized by submitting it to a market calculus.22
The chequered history of traded carbon permits and their mind-numbing technicalities of the ways in which these markets were foisted upon well-meaning reformers has been explained in a number of excellent papers by Larry Lohmann, which deserve to be much better known among environmentalists and the left in general.

More traditional advocates of free enterprise recognized that public goods—especially those that constitute infrastructure—were non-rivalrous, and in those instances the average cost of bringing additional units to market continued to decline with prolonged demand. Charging for “declining average cost,” they argued, was more sensible, allowing firms to recoup their investment while keeping the government’s hands off the economic life of the nation.
In 1946, economist Ronald Coase stepped into the fray, taking exception to Hotelling’s thesis by arguing that the social subsidies Hotelling advocated “would bring about a maldistribution of the factors of production, a maldistribution of income, and probably a loss similar to that which the scheme was designed to avoid.”5
Coase did not disagree with Hotelling that price should equal marginal cost, but he also believed that the total cost needed to be covered.

…

He reasoned that
a government willing to undertake such an enterprise is, for the same reasons, ready to build other dams in other and widely scattered places, and to construct a great variety of public works. Each of these entails benefits which are diffused widely among all classes. A rough randomness in distribution should be ample to ensure such a distribution of benefits that most persons in every part of the country would be better off by reason of the program as a whole.45
Ronald Coase didn’t buy Hotelling’s arguments. Recall that Coase, a free-market advocate, didn’t think government was a good prognosticator of consumer demand, even in the case where the public good or service in question was undeniably something everybody needed. He wrote, “I do not myself believe that a government could make accurate estimates of individual demand in a regime in which all prices were based on marginal costs.”46
Coase’s first argument, on closer scrutiny, appears rather spurious.

By combining related functions, the integrated entity can prevent rivals from depriving it of some essential component, as for instance when the Hollywood studios acquired movie theaters to prevent theater owners from shutting out studio products. Interesting, but beyond the scope of this book, is whether this defense function suggests an alternative explanation to the prevailing theory of the firm as shaped by the relative efficiency of internal and external contracting, which the economist Ronald Coase articulated in 1937.
† Technically, this is achieved by placing a “robots.txt” file on the root directory of the Web server in question. Google, for its part, could ignore the robots.txt files; in the United States that would foreground an unsettled copyright question, namely, whether expressly involuntary indexing is copyright infringement.
* At the time, it went by the name “BackRub.”
* Notable members of the alliance at its launch included China Mobile, Intel, NTT DOCOMO, Sprint/Nextel, T-Mobile, HTC, LG, Samsung, and Motorola

…

Rosen believes that Hoover and the broadcasters agreed on the need for more federal power, but that Congress refused to vest that power in the executive branch and instead created an independent agency.
22. The issues surrounding the Zenith decision and the subsequent formation of the FRC in 1927 are highly contested and subject to numerous interpretations. In contemporary accounts the Radio Act was promoted as a beneficent government response to industry “chaos”; the first to challenge this view, as a normative matter, was the economist Ronald Coase. R. H. Coase, Journal of Law and Economics vol. 2 (October 1959), 1–40. As a descriptive matter, the communications historian Robert McChesney’s groundbreaking 1993 book Telecommunications, Mass Media, and Democracy was among the first to present a highly critical history of the 1927 act, General Order 40, and all that followed—presenting the act as essentially a triumph of large corporate broadcasters.

The success of The General Theory turned its author into an international celebrity and Pigou, once a great prodigy, into something of a museum piece. Thereafter, he retreated into pure theory, publishing articles and books at regular intervals, but largely withholding public comment on the progress of the Keynesian revolution. In 1943, Pigou gave up his university professorship, retaining his fellowship at King’s. Thereafter, he retreated to his rooms and books, emerging rarely.
In 1960, a year after Pigou’s death, Ronald Coase, a conservatively inclined British economist who had moved to the University of Chicago, questioned whether the presence of spillovers justified government intervention. In a paper entitled “The Problem of Social Cost,” Coase pointed out that, in most cases, the problem came down to an issue of conflicting property rights. If a chemical factory releases noxious fumes into a nearby housing development, the factory’s “right” to carry out its legitimate business is ranged against the “right” of the people who live nearby to breathe clean air.

Rather than just favoring certain business allies, he also set up a competition among leading tycoons that would ultimately produce a few national industrial champions, companies like Samsung that made South Korea a leading export power.
However, no new important emerging nation has achieved this kind of success—growing rapidly thanks largely to the guiding hand of an activist state—in recent decades. Of course, many will respond, what about China? As the Nobel Prize–winning economist Ronald Coase has pointed out, the conventional story about China gets the narrative wrong. China started on the road to becoming an industrial superpower only after the all-encompassing state started to interfere less in the economy. Around 1980 the Chinese government began to ease its grip, one step at a time and always in response to pressure from below. Initially, peasants demanded to sell more of their own produce, then villages sought to run their own local enterprises, and finally individuals pressed for the right to own and run those enterprises. 3
Since the early 1980s, the output of private companies in China has risen by 300 times, or five times faster than the output of state companies, according to Deutsche Bank research.

To organize a widespread group around a task in the pre-Internet period, you needed a central office, staff devoted to coordinating efforts, expensive forms of long-distance communication (telegraphs, phone lines, trains), somebody to buy pencils and paper clips and to manage inventory. These are known as transaction costs, and they’re huge. But there was no way around them. As Shirky points out, following the analysis of economist Ronald Coase’s 1937 article “The Nature of the Firm,” you either paid the heavy costs of organizing or you didn’t organize at all and got nothing done.
And so for centuries, people collaborated massively only on tasks that would make enough money to afford those costs. You could work together globally at building and selling profitable cars (like the Ford Motor Company) or running a world religion (like the Catholic Church), or even running a big nonprofit that could solicit mass donations (like UNICEF).

…

When a dozen friends spread across a city use a Facebook thread and a cute little voting app to pick which film they’ll see on Friday night—“vote for your favorite!”—they are engaging in the same collective decision making that was previously available only to well-funded organizations. This, again, is basic behavioral economics: If you make it easier for people to do something, they’ll do more of it. Finding your way around Skyrim or resolving conundrums like “Which movie are we seeing tonight?” are problems that traditionally couldn’t afford Ronald Coase–style transactional costs—they fell “under the Coasean floor,” as Shirky puts it. But things have decisively changed. “Because we can now reach beneath the Coasean floor,” he writes, “we can have groups that operate with a birthday party’s informality and a multinational’s scope. . . . Now that group-forming has gone from hard to ridiculously easy, we are seeing an explosion of experiments with new groups and new kinds of groups.”

One may, for example, chance upon a paragraph describing the spacing of spark plug gaps, another prescribing the use of the expression ‘all day protection’ in antiperspirant labels, another describing the signing of documents related to excise taxes on structured settlement factoring transactions, and so on.14
What is objectionable about such overprovision of law? The first objection is that it represents an excessive reliance on coercion. Each of these regulations is a command backed up by a threat of force issued by the state against its citizens. While some of these threats may be justified, those that are not constitute a violation of the rights of all those who are thereby coerced.
Second, a surplus of laws can have large economic costs. Ronald Coase, Nobel laureate and former editor of the Journal of Law and Economics, reports that his journal published a series of empirical studies of the effects of a wide variety of regulations, in which it turned out that every regulation studied had overall negative effects on society.15 The Small Business Administration of the U.S. government has estimated the annual cost of federal regulations to the U.S. economy at $1.75 trillion, a burden that they find falls disproportionately on small businesses.16
Third, an excessive quantity of law, as well as an excessively complex and technical body of law, renders it unreasonable to demand that citizens know, understand, and follow all laws.

Some economists, recognizing the limitations of their approach, are now
returning to these earlier theories and trying to restate them in
terms of their own methodological assumptions. They are in
effect reinventing a forty- to ﬁfty-year-old wheel, which they
were responsible for forgetting how to use.
Institutional Economics and the Theory of Organizations
Economic theories about organizations1 begin with Ronald
Coase’s (1937) theory of the ﬁrm, which established the basic
For overviews of the intellectual history of the economists’s approach to organizational theory, see Furubotn and Richter (1997, chapter 8) and Moe (1984).
1
46
state-building
distinction between markets and hierarchies and argued that
certain resource allocation decisions were made within hierarchical organizations because of a need to economize on transaction costs.

One feature of the new information-based industries, such as Google or Facebook, which are financed mainly if not exclusively by advertising, is the user-takes-all phenomenon. Size is all-important so the leader effectively freezes out, or buys out, all would-be competing businesses. Anti-trust laws do not seem to apply where there are no competitors to collude with and regulators seem reluctant or unable to interfere. In America the government once split up AT&T. Why not the new giants?
Big may be seductive but is it necessary or sensible? Back in the 1930s Ronald Coase argued the case for the large corporation. Keeping everything in-house, he suggested, lowered the transaction costs when compared with negotiating with separate outside businesses. Put simply, if you employed them you could tell them what to do. The result of applying the Coase argument was the integrated organisation, where everything connected with the output of the organisation was both owned and managed by it.

Collapse of “Transaction Costs”
When we asked Beal which are the most commonly listed items on Freecycle, he explained that “there isn’t one particular thing” but instead massive categories of “inconvenient things” (old pianos, sofas, and televisions) and “unusual items” (disco balls, fish tanks, and even stuffed animals). These are the items that would have been a pain to lug to the dump (and sometimes you would even have to pay to dispose of them) or tricky to unload on a neighbor. The transaction costs to ensure they were kept in use, not in landfill, would have been high. In his paper “The Nature of the Firm,” economist and Nobel laureate Ronald Coase coined the term “transaction costs” to refer to the cost of making any form of exchange or participating in a market.3 If you go to the supermarket, for example, and buy some groceries, your costs are not just the price of the groceries but the energy, time, and effort required to write your list, travel to and from the store, wheel around your cart and choose your products, wait in the checkout line, and unpack and put away the groceries when you get back home.

However, everyone had cheerfully lived with this way of settling foreign
exchange trades for generations up to 1971.There just wasn’t that much business under the stable rates of Bretton Woods or the gold standard before.
Then, overnight, the global foreign exchange market grew by leaps and bounds
as currencies were allowed to ﬂoat against each other in market trading.
This is where the revolution in technology comes into play. If there is a great
deal of friction in making a market transaction, as Nobel Prize–winning economist Ronald Coase pointed out 80 years ago, it will tend to be replaced
by bureaucratic command and control or not occur at all. This is why so
much “business” takes place within huge corporations instead of free markets.
Bretton Woods was very much a bureaucratic solution worked out between
governments. Ending it opened up a huge scope for market transactions overnight, but the friction encountered was monumental.The key steps in a market
transaction are ﬁnding a counterparty to take the other side of the trade;
qualifying the counterparty as trustworthy; price discovery, which is essentially using the market to determine if the counterparty is offering or taking a
fair price; executing the trade—essentially making a contract; and settling the
trade (i.e., paying or getting paid).

Infinitely flexible and adaptable, general-purpose industrial robots can be combined to create the universal Making Machine. And like computers, they work at any scale, from the mile-long NUMMI plant to your desktop. That—not just the rise of advanced technology, but also its democratization—is the real revolution.
Chapter 9
The Open Organization
To make things a new way, you need to make companies a new way, too.
In the mid-1930s, Ronald Coase, then a recent London School of Economics graduate, was musing over what to many people might have seemed a silly question: Why do companies exist? Why do we pledge our allegiance to an institution and gather in the same building to get things done? His eventual answer, which he published in his landmark 1937 article “The Nature of the Firm,”33 was this: companies exist to minimize “transaction costs”—time, hassle, confusion, mistakes.

It is that the world should adjust as efficiently as possible—which, remember, means at the least possible cost—to a low-carbon future. The issue of who compensates whom is completely independent of this problem and, as with all natural assets and liabilities, has no clear guiding principles by which ownership of carbon liabilities can be assigned. Indeed, there is a famous economic theorem by the Nobel Laureate Ronald Coase which makes precisely this point. The efficient outcome is independent of how the property rights are assigned. Because international cap-and-trade creates national property rights for emissions, it provokes an intense international struggle over how these rights should be assigned. The alternative that I have suggested is that governments should agree to a common set of taxes-cum-regulation that curb global emissions to safe levels and do not induce activities to relocate to evade facing social costs.

We haven’t looked at the contracts that food producers have with grocery chains, but we’d bet that they lead both parties to care how many boxes of cereal or cans of beans get sold. Even if it’s not specified in the contract, you can be sure it’d come up the next time the grocer and its suppliers get together to do business.
6. Jean Tirole and Jean-Charles Rochet convey this point more precisely in a 2006 article where they show that two-sided markets are only necessary when the Coase Theorem fails. This theorem, more a conjecture provided by economist Ronald Coase, essentially argues that free markets maximize efficiency in the absence of externalities or transaction costs. Andrei Hagiu and Julian Wright explore the continuum of reseller and pure marketplace in “Do You Really Want to Be an eBay?” Harvard Business Review, March 2013.
7. We thank Pierre Azoulay for this.
8. David S. Evans and Richard Schmalensee, “Markets with Two-Sided Platforms,” Issues in Competition Law and Policy (ABA Section of Antitrust Law) 1, chap. 28 (2008); Joe Nocera, A Piece of the Action: How the Middle Class Joined the Moneyed Class (New York: Simon & Schuster, 1994).

pages: 239words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return
by
Mihir Desai

Indeed, the Journal of Law and Economics dedicated a special issue to alternative accounts and interpretations of this merger—a remarkable fact given economists’ skepticism about anecdotes. While there are innumerable variants, there are two primary interpretations of this romance that progresses from spot market transaction to long-term contractual arrangements and then all the way to merger. Each of these interpretations—the transaction cost approach and the property rights approach—is associated with a Nobel Prize (Ronald Coase in 1991 and Oliver Hart and Bengt Holmström in 2016), so, by academic standards, this is a prize fight.
The considerably less romantic interpretation is that GM merged with Fisher in 1926 because the ongoing costs of contracting with each other just became too high. Yes, they could have stayed separate and just kept contracting and renegotiating contracts, but it’s so costly to write these contracts, and if they merged, they wouldn’t have to keep writing new contracts all the time.

Like Lindbeck, Stahl began his upward climb early, while he was still in high school, as a protégé of various Social Democratic politicians, including Palme, but he had gone over to the conservative opposition in the late 1960s.
Stahl was deeply and adamantly opposed to awarding the prize to Nash. From the start, he was highly skeptical of game theory — as indeed he is of all pure theory. He is an institutionalist, likes intuitive rather than formal reasoning, and is leery of mathematics and “technicians.” He was, for example, a main mover behind the prizes for James Buchanan in 1986 and Ronald Coase in 1991 — economists whose theories focus on the way governments and legal structures affect the workings of markets. He also prides himself on grasping Nobel politics. The more he learned about Nash, the less he liked the idea of giving Nash a prize. In particular, he considered giving the prize to Nash the kind of ill-considered gesture that was likely to result in embarrassment and, more important, make the committee look bad.

…

The current generation of economic policymakers — including Lawrence Summers, undersecretary of the treasury, Joseph Stiglitz, chairman of the Council of Economic Advisers, and Vice-President Al Gore — are steeped in the stuff, which, they say, is useful for thinking about everything from budget proposals to Federal Reserve policy to pollution cleanups.
The most dramatic use of game theory is by governments from Australia to Mexico to sell scarce public resources to buyers best able to develop them. The radio spectrum, T-bills, oil leases, timber, and pollution rights are now sold in auctions designed by game theorists — with far greater success than that of earlier policies.13’
Economists like Nobel Laureate Ronald Coase have advocated the use of auctions by government since the 1950s.14 Auctions have long been used in markets where sellers of unusual items — from vintage wines to movie rights — have no idea what bidders are willing to pay. Their basic purpose is to make bidders reveal how much they value the item. But the arguments of Coase and others were stated in abstract, entirely theoretical terms, and little thought was given to how such auctions would actually be conducted.

The BBC’s first chief engineer, Peter Eckersley, championed a grand national scheme for wired broadcasting after he was forced from the corporation for being cited in a divorce – a scheme that was inspired in part by Secret Wireless’s ambitions in the twenties. But he did so in hopes of providing a media vehicle for the British fascist Sir Oswald Mosley, who was secretly his employer. At any rate, the practices of pirate listening undermined the BBC’s prized concept of “balance,” which, as the economist Ronald Coase demonstrated in his powerful midcentury critique, had always been its real raison d’être.
That put in question the nature of broadcasting as a medium. In a realm of listener piracy, the messages put out might differ radically from those being received. Pirate listening threatened to create a nation of autonomous, individualized agents – modern Menocchios, as it were, ready and able to listen as unpredictably as the nowfamous Italian miller had read in the sixteenth century.

…

It was nowhere more so than at the institutional home of 1930s economic liberalism, the London School of Economics. Probably the prime mover there of this kind of argument was Arnold Plant (1898–1978), an engineerturnedeconomist. Plant never published very much by the standards of professional economists, and most of his later career was spent as a Whitehall apparatchik. He has been far less renowned than colleagues of the time like Friedrich von Hayek and his own onetime assistant Ronald Coase. But he was extremely influential behind the scenes, not least by virtue of being personally associated with many of the economists who chafed at Keynesian orthodoxy after the war. In papers that he did publish on copyright and patents in the 1930s, and in later ones addressing public broadcasting, Plant laid out a template for their attack. He did so on the basis of what was, in fact, an extensive and intensive excavation of the archival and statistical evidence on the history of copyrights and patents.

Then to support the legal argument, there were a number of powerful briefs by libraries and archives, including the Internet Archive, the American Association of Law Libraries, and the National Writers Union.
But two briefs captured the policy argument best. One made the argument I've already described: A brief by Hal Roach Studios argued that unless the law was struck, a whole generation of American film would disappear. The other made the economic argument absolutely clear.
This economists' brief was signed by seventeen economists, including five Nobel Prize winners, including Ronald Coase, James Buchanan, Milton Friedman, Kenneth Arrow, and George Akerlof. The economists, as the list of Nobel winners demonstrates, spanned the political spectrum. Their conclusions were powerful: There was no plausible claim that extending the terms of existing copyrights would do anything to increase incentives to create. Such extensions were nothing more than "rent-seeking"—the fancy term economists use to describe special-interest legislation gone wild.

The agency and advertising need to get out of the way in the relationship between companies and customers. Agencies may help solve problems—teaching companies how to build networks with customers, assisting them with product launches—but once the consultation is done, the good consultant leaves town.
Tobaccowala suggested agencies remake themselves as networks. He quoted University of Chicago economist Ronald Coase in his seminal 1937 essay, “The Nature of the Firm”—which is also quoted in Wikinomics, Here Comes Everybody, and, it would seem, half the business books published lately. Coase reasoned that firms exist and grow when internal friction is less than external friction, when it is easier and cheaper to deal with insiders than with outsiders. “In a networked world, it’s easier for us to work with outside people than inside people,” Tobaccowala said.

At the same time many
environmentalists have come to accept the market-based approach as
a mechanism to address climate change.
In the Markets for Clean Air
The philosophy of cap-and-trade systems for dealing with environmental issues is not a result of unrestrained market capitalism, but
rather the refinement of an academic debate which has lasted almost
50 years. It can be traced back to an article in 1960, ‘The Problem of
Social Cost’ by Ronald Coase. The British-born economist (and Nobel
Prize winner for economics in 1991), suggests that well-defined property rights could control ‘externalities.’18 (Latterly this has been taken
to mean the effects of economic activity on the environment.) Coase
refutes the work of Arthur Cecil Pigou, who, in 1920, recommended
corrective taxes to discourage activities that generate ‘externalities’
(Hahn and Stavins, 1992)
Coase’s work was followed by more research when Thomas
Crocker in 1966 and John Dales in 1968 each wrote papers about the
prospect of using transferable permits to allocate the pollution-control
burden between emitters.

If a right is valuable to two people and belongs to the one who values it less, his neighbor can always offer to buy it from him. If you have the right to order me to shut down my candy factory, I can offer instead to pay the cost of tearing down your consulting room and rebuilding it on the other side of the lot. If the right is more valuable to me than to you, I should be able to make some offer that you will accept.
This insight leads us to the Coase Theorem, named after Ronald Coase, the economist whose ideas are largely responsible for this part of the chapter. The Coase Theorem states that any initial definition of property rights will lead to an efficient outcome, provided that transaction costs are zero.
The condition — zero transaction costs — is as important as the theorem. Suppose we start with a definition of property rights that forbids trespassing photons; anyone may forbid me from making a light that he can see.

The difference is stark. Not, though, stark enough to step from here to what the business writers Larry Downes and Chunka Mui call the "Law of Diminishing Firms." After all, it's GM that's shrinking. Microsoft continues to grow while other high-tech start-ups compete for the title of "fastest growing ever." 22
Downes and Mui draw on the theory of the firm proposed by the Nobel Prize-winning economist Ronald Coase. Coase developed the notion of transaction costs. These are the costs of using the marketplace, of searching, evaluating, contracting, and enforcing. When it is cheaper to do these as an organization than as an individual, organizations will form. Conversely, as transaction costs fall, this glue dissolves and firms and organizations break apart. Ultimately, the theory suggests, if transaction costs become low enough, there will be no formal organizations, but only individuals in market relations.

It was in these breathless tones that George Stigler recounted one particular workshop in 1960, which took place in Aaron Director’s home in Hyde Park. Stigler would never forget that evening and later cursed Director for not having tape-recorded it.13 It became a turning point for his career and for the Chicago School more generally. Arguably, it was a turning point for the project of neoliberalism.
The paper that was discussed that evening was the work of the British economist Ronald Coase, then of the University of Virginia. Coase always resisted the iconic status that Stigler and others were keen to bestow upon him. His career had progressed quietly and methodically, through asking simple scientific questions about why economic institutions are structured as they are. He claimed never to understand the excitement that his work had engendered. He collected his 1991 Nobel with the words ‘What I have done has been determined by factors which were no part of my choosing’, a sentiment that would have struck the chip-on-shoulder, competitive individualists of Chicago as akin to defeatism.

These technologies will radically reduce the cost of
doing business in this increasingly important commercial space.
LEGO-ized innovation is just one component of what Tim
O’Reilly first tagged “Web 2.0.”29 It may ultimately be the most
important. For it demonstrates both how the Internet is uniquely
poised to exploit a general tenet of economics and how the Internet
takes advantage of the principle of democratization that is its hallmark. Consider these two in turn.
Economics
In 1937 Nobel laureate Ronald Coase was wondering why there
were firms in a free market.30 If the core of a market was that
resources should be allocated by price, why within a firm wasn’t
it price that determined who got what? Within a firm it was the
command of a “boss.” Life inside the firm thus looked more like
the “economic planning” of communism than the competition of a
marketplace. Why? Why weren’t firms built like free markets?

The problems inherent in managing these transaction costs are one of the basic constraints shaping institutions of all kinds.
This ability of the traditional management structure to simplify coordination helps answer one of the most famous questions in all of economics: If markets are such a good idea, why do we have organizations at all? Why can’t all exchanges of value happen in the market? This question originally was posed by Ronald Coase in 1937 in his famous paper “The Nature of the Firm,” wherein he also offered the first coherent explanation of the value of hierarchical organization. Coase realized that workers could simply contract with one another, selling their labor, and buying the labor of others in turn, in a market, without needing any managerial oversight. However, a completely open market for labor, reasoned Coase, would underperform labor in firms because of the transaction costs, and in particular the costs of discovering the options and making and enforcing agreements among the participating parties.

The General Public
License (also known colloquially as copyleft), which was developed for
the Free Software Foundation by Richard Stallman and Eben Moglen,
assures that FOSS cannot become private property and remains instead a
Common Good from which anyone may benefit and to which anyone may
contribute (if she is able). This Internet-mediated intellectual commons is
a key feature of the peer-production system, and we will return to it later.
The final Im portant feature of the new system is that peer produc­
tion is based neither on incentives coming from the market nor on or­
ders coming from a boss or managing supervisor. A now-classic analysis
of capitalist production spearheaded by Ronald Coase in the 1930s and
developed subsequently by Oliver Williamson and others examined the
relative transaction costs to a business firm of buying goods and services
on the open market compared to hiring people to produce those same
goods and services within the firm.95 Where transaction costs of buying
on the open market are high, production is integrated into the firm and
triggered by managerial command; where they are low, production is out­
sourced and triggered by market pricing mechanisms.

She tried everything: pointing to famous economists, explaining their most influential theories, describing important experimental results. But Weinstein was resistant. The mathematics, he was convinced, was too simple; the subject matter, too complex. Economics was a worthless pursuit, a pseudoscience. Finally, on the verge of giving up, Malaney tried one last tack. She gave Weinstein a challenge, a problem whose solution was equivalent to a classic result in economics known as Coase’s theorem.
Ronald Coase was a British economist who spent most of his career in the United States, at the University of Chicago. He was interested in something he called “social cost.” Imagine you are the local sheriff in an agricultural community. Two of your constituents come to you, asking you to help them settle an ongoing dispute. One of them is a rancher, raising cattle. The other, the rancher’s neighbor, farms soybeans.

And corporations are increasingly owned by foreign shareholders,
led by pension and private equity funds.
The commodification of companies means that commitments made by
today’s owners are not worth as much as they used to be. The owners could
be out tomorrow, along with their management teams and the nods-andhandshakes that make up informal bargains about how labour is done, how
payments should be honoured and how people are treated in moments of need.
In 1937, Ronald Coase set out a theory that was to earn him a Nobel
Prize in Economics. He argued that firms, with their hierarchies, were
superior to atomised markets made up solely of individuals; they reduced
the transaction costs of doing business, one reason being that they fostered
long-term relationships based on trust. This reasoning has collapsed. Now
that opportunistic buyers can amass vast funds and take over even well-run
companies, there is less incentive to form trust relationships inside firms.

And the concentration of the most valuable bits of the production chain into smaller, highly profitable firms means that workers across the rest of the economy struggle to share in the gains from growth.
Small, brainy companies are responsible for producing enormous economic value in the digital era. The result is a big distributional mess.
THE NATURE OF THE COMPANY
‘Why do firms exist?’ seems like the sort of question economists should have no trouble answering. Yet when Ronald Coase began probing at the idea in a 1937 academic paper, it quickly became clear that the question was a surprisingly tricky one.2 Coase was a British economist who lived an extraordinarily long and productive life. He lived to be 102, and still kept busy writing at 100, though his work in the 1930s, when he was in his twenties, was among his most important. It suggested an entire sub-field’s worth of mysteries waiting to be understood: a corner of economics now known as industrial organization.

The bank’s bang for its marketing buck just tripled.
The trees we’ve seen achieve various lifts at the 20 percent mark:
Decision Tree Lift at 20 Percent
4 segments 2.5
10 segments 2.8
39 segments 3.0
As the tree gets bigger, it keeps getting better, so why stop there? Shall we keep going? Slow down, Icarus! I’ve got a bad feeling about this.
Overlearning: Assuming Too Much
If you torture the data long enough, it will confess.
—Ronald Coase, Professor of Economics, University of Chicago
There are three kinds of lies: lies, damned lies, and statistics.
—British Prime Minister Benjamin Disraeli (quote popularized by Mark Twain)
An unlimited amount of computational resources is like dynamite: If used properly, it can move mountains. Used improperly, it can blow up your garage or your portfolio.
—David Leinweber, Nerds on Wall Street
A few years ago, Berkeley Professor David Leinweber made waves with his discovery that the annual closing price of the S&P 500 stock market index could have been predicted from 1983 to 1993 by the rate of butter production in Bangladesh.

THE CASE AGAINST REGULATION
Despite the problems illustrated by platform business like Monkey-Parking, there are many who would argue that the potential abuses and social dislocations caused by platforms are a small price for the tremendous innovation, new value, and economic growth they produce. Platform businesses are here to stay, and they are bringing undoubted benefits to millions of people. Why run the risk of discouraging innovation through the heavy hand of regulation?
Opponents of regulation are quick to point out the many cases in which it fails or backfires. Nobel Prize-winners Ronald Coase and George Stigler, members of the famous laissez-faire-oriented Chicago School of economics, argue that the vast majority of market failures are best addressed by market mechanisms themselves—for example, by encouraging the free growth of competitors who provide goods and services that produce greater social benefits than their rivals. In their view, the evidence of history suggests that government regulators tend to be incompetent or corrupt, which means that regulation generally fails to solve the problems it is intended to address.

Simon, “Organizations and Markets,” The Journal of Economic Perspectives 5 (1991): 25–44.
5. Alfred D. Chandler Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Harvard University Press, 1993; original published 1977).
6. I realize that a lot of Malone, Yates, and Benjamin’s work, and Vijay Gurbaxani and Seungjin Whang’s work, draws from seminal earlier work by Friedrich Hayek (1937), Ronald Coase (1945), and Oliver E. Williamson’s work, perhaps even later work by Sanford Grossman, Oliver Hart, and John Moore, and a host of other excellent economists and social scientists. I am not attempting a systematic analysis of the literature here, but a brief discussion of some intellectual foundations.
7. Malone, Yates, and Benjamin, “Electronic Markets,” 487.
8. Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York: Free Press, 1975).
9.

The rise of the horizontal economy
Vertically integrated value chains, controlled by companies that exclude customers, are being challenged by new value ecosystems orchestrated by customers themselves. The new ecosystems allow consumers to design, build, market, distribute and trade goods and services by and among themselves, without the need for intermediaries. This bottom-up approach is creating the horizontal economy. In a 1937 essay, Ronald Coase, a Nobel Prize-winning economist, argued that the reason Western economies are organised vertically – like a pyramid with a few large producers at the top and millions of passive consumers at the bottom – is because of transaction costs (the intangible costs associated with search, bargaining, decision-making and enforcement).5 But with the explosion of the internet, mobile technologies and social media – think of the 1.3 billion interconnected Facebook users – these transaction costs have all but disappeared in many sectors.

pages: 443words: 98,113

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay
by
Guy Standing

The second highly influential MPS member, possibly even more so than Hayek, was Milton Friedman, who had been the youngest inaugural member of the society in 1947. Associated with monetarism – and with supporting Pinochet, Thatcher and Reagan – in 1976 he too went on to receive a Nobel Prize for Economics. He and Hayek were two of the eight original members who received the prize, the others being George Stigler, James Buchanan, Maurice Allais, Ronald Coase, Gary Becker and Vernon Smith.
The third influential economist was Ludwig von Mises, proponent of the nineteenth-century Austrian school of economics, which shaped neo-liberalism. One of its tenets was that value could be measured only by the market. So something without ‘exchange value’ had no value at all. This helps explain the contempt of neo-liberals for preserving the commons and protecting the environment.

Within months, lawyers were preparing suits intended to break one or another of these monopolies; in 1602, a competing merchant named Thomas Allein imported his own cards, and Darcy sued. In a slightly perverse reminder that lawyers have clients, not opinions, Edward Coke, as the Attorney General of England, represented Darcy, whose hostility to monopolies was already well known, though less as a matter of principle and more as a matter of economics: Coke was convinced that monopolies were costly6 to Britain’s artisans.
In 1961, the British economist Ronald Coase published an article entitled “The Problem of Social Cost” that jump-started one of the most influential ideas in modern legal theory: the school familiarly known as Law and Economics, which proposes that legal decisions ought to account for economic efficiency as well as more traditional measures such as legislative history or case precedent. Had Coase lived three centuries earlier, he would have found Coke a most congenial colleague, since Coke’s arguments against monopolies were almost entirely derived from their economic impact, specifically on the need for full employment of England’s skilled craftsmen; decades before7 Darcy v.

Markets alone fail to make us better off when there is a large gap between the private cost of some activity and the social cost. Reasonable people can and should debate what the appropriate remedy might be. Often it will involve government.
Of course, sometimes it may not. The parties involved in an externality have an incentive to come to a private agreement on their own. This was the insight of Ronald Coase, a University of Chicago economist who won the Nobel Prize in 1991. If the circumstances are right, one party to an externality can pay the other party to change their behavior. When my neighbor Stuart started playing his bongos, I could have paid him to stop, or to take up a less annoying instrument. If my disutility from his noise is greater than his utility from playing, I could theoretically write him a check to put the bongos away and leave us both better off.

“You are completely unscientific!” he cried, in utter despair. I had resolved to remain calm so I just smiled at this outburst, said, “Okay then,” and moved on. There was much more contentious material still to come, and I was determined not to get into a shouting contest, especially with a federal judge!
The biggest fight was about something called the Coase theorem. The Coase theorem is named for its inventor, Ronald Coase, who had been a faculty member at University of Chicago Law School for many years. The theorem can be easily stated: in the absence of transaction costs, meaning that people can easily trade with one another, resources will flow to their highest-valued use.‡
The logic is easy to explain. I will follow Coase’s lead and explain it with a simple numerical example. Suppose that Alexa and Julia are college roommates.

While Silicon Valley technology companies employ fewer workers than their industrial-age counterparts such as General Motors, their global services platforms facilitate portable and digital work for the connected masses whether posting advertisements, verifying addresses, photographing for registries, comparing prices for companies, or performing other basic tasks. A digital middle class is emerging whose prerequisite is not a broad consumer base or even a market economy but online connectivity.
Economists such as Ronald Coase sought to determine the optimal size of firms to reduce transaction costs in carrying out certain functions efficiently. Today’s network structures that leverage growing frictionless connectivity shatter previous assumptions by expanding in scale without commensurate growth in size. Even as traditional productivity metrics still fail to capture all the benefits created by such connectivity, innovation itself very much depends on it.

Growth in its market gave it greater clout to negotiate lower prices with food suppliers, further expanding its cost advantages, allowing A&P to grow and capture substantial market share across the country.5 In so doing, A&P changed the nature of the food retailing industry and the way companies needed to organize themselves to compete. As a result, the boundary of firms in the industry came to incorporate many of the functions that, before A&P’s ascendency, would have been undertaken through market transactions.
Defining Enterprise Boundaries
Ronald Coase argued in “The Nature of the Firm” (one of the most famous essays in the history of economics) that the boundaries of a business enterprise could not be understood without thinking about the decision of when work should be done inside versus outside of the organization. Many of the activities of corporations involve the allocation of resources across different activities. This is precisely what markets do.

The reason the recipe worked is that it has enabled poor countries to get much more out of their economies than the low productive skills of their populations would otherwise have allowed at an early stage of development. Governments manipulated economies which thereby forged ahead and created wealth that paid for people – who cannot be neatly transformed by government policy – to catch up.
Neo-classical economists do not like political intervention in markets. They claim that markets are inherently efficient. But history shows that markets – with the primordial exception of what the institutional economist Ronald Coase dismissed as ‘individuals exchanging nuts for berries on the edge of the forest’ – are created.1 Which is to say that in a functioning society markets are shaped and re-shaped by political power. Without the dispossession of landlords in Japan, Korea, Taiwan and China there would have been no increased agricultural surplus to prime industrialisation. Without the focus on manufacturing for export, there would have been no way to engage tens of millions of former farmers in the modern economy.

Gherardi, who is absent from existing histories of the early Bell System, was a chief architect of AT&T’s methodical and deliberate style of “normal design” that regulators eventually came to view with suspicion.6
The prevailing caricature of standardization in the Bell monopoly as closed and monolithic also suffers from a second weakness: it fails to account for activities that occurred across the boundaries of the Bell System. Boundary activities, as we have seen, are crucial sites where managers and engineers decide through managerial hierarchies what they can make or decide inside their firm, and what they need to do with respect to markets and organizations that exist outside the firm. In some cases, these decisions can be understood in terms of economic efficiency, using the economist Ronald Coase’s concept of transaction costs.7 The problem with the concept is that it tends to reduce – or ignore altogether – strategic, political, and cultural factors that are in many cases decisive. We deceive ourselves if we pretend that decisions to build from within or purchase from without are made solely on the grounds of economic efficiency.
In the late nineteenth and early twentieth centuries, Bell engineers were deeply suspicious of the “outsiders” described by Jewett in 1915 as those who were looking for “reason to assert that what we are attempting to do is to muzzle all possible development.”

Strangelove-before dying at
the age of fifty-three.
John Nash was author of the principal solution concept in game
theory-the Nash equilibrium-but his productive career was ended
by schizophrenia. His health partially restored, he was awarded the
Nobel Prize in 1994. 21 Nash was played by Russell Crowe in an
Oscar-winning film of his life, A Beautiful Mind.
Institutional (or transactions cost) economics regards as its
founder Ronald Coase,n a British economist who spent most of his
career at the University of Chicago. His claim to fame rests mainly on
two articles, published almost twenty-five years apart. The first was
concerned with the theory of the firm. In the perfectly competitive
world of Part III, firms played little or no role. There are many similar
producers of every commodity. In Parts II and IV of this book, there
are frequent references to individual firms; in Part III, almost none.

Anderson and Hill conclude that in the absence of a government monopoly of coercion, multiple private law enforcers emerged, and competition among them drove improvements and innovations that thrived by natural selection. In effect, the cattlemen of the nineteenth century rediscovered what medieval merchants had found – that customs and laws would emerge where they were not imposed. It was very far from anarchic.
Robert Ellickson of Yale documented a good example of this more recently in Shasta County, California, an area of farms and ranches. Taking his cue from a famous example given by the economist Ronald Coase (who argued that in the absence of transaction costs, wrongs between cattle ranchers and wheat farmers would be righted by private negotiation rather than state punishment), Ellickson looked to see how individuals actually dealt with trespassing cattle. He found that the law was largely irrelevant. People dealt with the problem privately, sometimes even illegally. For example, they would call the owner of the cattle and ask him to retrieve his errant beasts; if he failed to do so persistently, he would be punished by finding his animals driven away in the wrong direction, or even castrated.

pages: 409words: 118,448

An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy
by
Marc Levinson

Deregulation was not an entirely new concept in 1974. Congress had briefly considered rolling back some of the regulations governing trains and trucks in 1957, and in 1968 the Federal Communications Commission had allowed customers to connect some of their own equipment to the telephone network, a tiny step toward deregulation of the telecommunications sector. More consequentially, economists such as George Stigler and Ronald Coase, both of the University of Chicago, had been laying the intellectual framework for deregulation since the 1950s by arguing that the economy would be better off if prices for particular goods and services were determined by competition rather than the dictates of government agencies. The Ford Foundation had jumped into the fray in 1967, granting the Brookings Institution, a Washington think tank, $1.8 million for a program of studies that resulted in 125 books, journal articles, and dissertations on regulation or deregulation by 1975.

And Moore’s law will continue to operate, driving prices down and performance up for all manner of digital goods, at rates unheard of in history prior to the computer era.
So the technology seems to support decentralizing all the things. What about the economics? What does economic theory and evidence have to say about how tech progress changes companies and other ways we organize to get work done? Quite a lot, actually.
. . . Meet the Economics of the Firm
In November 1937, when he was just twenty-six, the economist Ronald Coase published his landmark paper “The Nature of the Firm.” In it, he posed a very basic question: If markets are so great, why does so much happen inside companies? Why, in other words, do we choose to conduct so much economic activity within these stable, hierarchical, often large and bureaucratic structures called companies, rather than just all working as independent freelancers, coming together as needed and for only as long as necessary to complete a particular project, then going our own way afterward?

They may be in a position to nickel-and-dime those who suffer damage, since many people cannot hold out for adequate compensation, nor can they afford lawyers to match those of the company. One role of government is to rebalance the scales of justice—and in the case of the BP disaster, it did, but very gently, and in the end, it became clear that many of the victims were likely to receive compensation that was but a fraction of what they suffered.4
Ronald Coase, a Chicago Nobel Prize–winning economist, explained how different ways of assigning property rights were equally efficient for addressing externalities, or at least would be in a hypothetical world with no transactions costs.5 In a room with smokers and nonsmokers, one could assign the “air rights” to the smokers, and if the nonsmokers valued clean air more than the smokers valued smoking, they could bribe the smokers not to smoke.

This son of working-class Jewish immigrants became an extreme political conservative at a time when those brought up like him were mostly liberals. His main competitor for conservative attention, Ayn Rand, a Russian-Jewish immigrant, was more romantic than analytical—her reputation depended on her novels far more than her philosophical essays. Friedman’s popularity also eased the path toward acceptability for complex analyses made by some of his controversial rightist economist colleagues, such as James Buchanan and Ronald Coase, who also advocated minimal government regulation and oversight.
Friedman remained the avatar of the conservative cause, however. He embarked on an intellectual adventure, doing seemingly fearless battle in academia and the halls of political power with the best minds of his time. Without him, the nation’s newly harsh attitudes toward government would not have become nearly as respectable or as popular.

The trend is to keep going, flinging ourselves ever farther into space, until we scatter completely, forming what Melvin Webber might have called companies without propinquity—maybe the next step in corporate evolution.
Corporations have struggled with how and where to best arrange themselves since Henry Ford built the world’s biggest factory outside Detroit, then changed his mind and started taking it apart. In 1937, the economist Ronald Coase wrote “The Nature of the Firm,” exploring just how big a vertically integrated one like Ford’s might get. Not much bigger, he argued, because beyond a certain point, the drag of managing huge organizations over long distances would offset any advantages of scale. Size mattered, however, if advances in transportation, communication, and management techniques could shrink these distances and di-minish the drag.

As anyone who has worked in one knows, corporations are the last bastion of authoritarianism: the single CEO at the top has, with the leave of his board of directors, more or less total freedom to order his organization around like an army. At the same time, the people working within this hierarchy are supposed to cooperate, and not compete, against each other.
This apparent contradiction between the competitive free market and the cooperative yet authoritarian firm was the starting point of a seminal article written in the 1930s by the economist Ronald Coase.11 Coase noted that the essence of the market was the price mechanism, which brought supply and demand into equilibrium, but that within the firm, the price mechanism was suppressed and goods were allocated by command. If the price mechanism was deemed so efficient, the question arose: Why did firms exist at all? It is conceivable, for example, that cars could be manufactured entirely without car companies in a decentralized market.

He was therefore more concerned to show that markets will clear automatically via price adjustments in response to positive or negative excess demand – a property that he labeled ‘tatonnement’ – than to prove that a unique set of prices and quantities is capable of clearing all markets simultaneously.
By the time we got to Arrow and Debreu, however, general equilibrium theory had ceased to make any descriptive claim about actual economic systems and had become a purely formal apparatus about a quasi economy. It had become a perfect example of what Ronald Coase has called ‘blackboard economics,’ a model that can be written down on blackboards using economic terms like ‘prices,’ ‘quantities,’ ‘factors of production,’ and so on, but that nevertheless is clearly and even scandalously unrepresentative of any recognizable economic system. (Blaug 1998)
A hobbled general It is almost superfluous to describe the core assumptions of Debreu’s model as unrealistic: a single point in time at which all production and exchange for all time is determined; a set of commodities – including those which will be invented and produced in the distant future – which is known to all consumers; producers who know all the inputs that will ever be needed to produce their commodities; even a vision of ‘uncertainty’ in which the possible states of the future are already known, so that certainty and uncertainty are formally identical.

pages: 827words: 239,762

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite
by
Duff McDonald

“[We’ve seen] the disappearance of an essential situated holistic understanding of how the bits fit together to create vitality and value,” he says. “The business schools conspired to accelerate this trend to ignore the big picture, wiping out the ‘general management’ syllabus and replacing it with specialist curricula. One interesting result is that none of the faculty bothers to claim to understand (or research) the firm as a whole. They thereby conspire to forget [Ronald Coase’s fundamental questions about the nature of the firm itself]—‘Why do firms exist?,’ ‘Why are their boundaries where they are?,’ ‘Why are their internal arrangements as they are?,’ and ‘Why is their performance so varied?’ Instead business school teachers happily presume answers to these questions and fiddle around at their edges and theorize marginal improvements.”8
It’s heady stuff, but it’s also incredibly important.

Lack of access to computers and the Internet inside the home greatly handicap the efforts to succeed in school of students whose families live in poverty, for they are competing with the majority of students, who have computers at home and who have parents who show how to use them. Internet illiteracy, the inability to navigate through this new source of learning and information, creates a handicap that can last a lifetime.
Another less familiar problem is that we may be creating too much data. Ronald Coase, a University of Chicago economist who won the Nobel Prize, long ago warned that “if you torture the data long enough, it will confess to anything.” Information on the Internet is bountiful and varied, but for all the valuable resources, there are flawed resources as well. At the level of students from elementary school to college, the Internet makes possible Internet bullying. The Internet allows both good and bad ideas to travel around the world instantly, and the Internet can not only create revolutions like the Arab Spring, but also spread disillusionment and misleading information.